Posted
by
samzenpus
on Friday March 23, 2012 @08:05AM
from the let-the-flaming-begin dept.

eldavojohn writes "As the political rhetoric heats up, there's something puzzling about drilling inside the United States. Essentially, it doesn't reduce what we pay at the pump. From the article, 'A statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production by The Associated Press shows no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.' If the promises that politicians made when they opened U.S. drilling were true, then we should be paying about $2 a gallon now. Instead it's $4 a gallon. Minnesota Public Radio pulls some choice quotes from both parties and wonders why this decades-old empirical observation goes seemingly completely unnoticed."

Submitter here, my mistake on that above source. When I read this in my news feed yesterday, I didn't see the AP markings all around this story. All of it appears to be completely and solely Associated Press sourced [google.com]. I apologize if that confused anyone.

Noticed that when I was looking to see if anyone had come up with a sufficient rebuttal to this empirical link but aside from a few [kansascity.com] insane pundits [rushlimbaugh.com], I didn't find much. The remaining arguments for "drill here, drill now" probably rests on "job creation" (waiting on that fact check) and, according to Thomas McClanahan from the Kansas City Star, it "means fewer dollars going to nasty, unstable regimes and more revenue for the Treasury, especially if the drilling is on public lands." He might be right about lowering the trade deficit but I think there are other things we could stop doing to prevent unstable regimes [wikipedia.org].

Drilling domestically might not lower the price of gasoline, but perhaps it creates a buffer in case worldwide oil flows are disrupted. That is, if all oil is imported and there is a boycott against the U. S., we are back to 1973, waiting in gas lines. If a local industry had to begin from scratch, prices would presumably be high for quite a while.

Having at least the ability to drill locally should prevent huge price swings every time there is a panic. The price might rise for a while, but presumably the large oil producing companies would return to the market with slightly lower prices.

Drilling domestically might not lower the price of gasoline, but perhaps it creates a buffer in case worldwide oil flows are disrupted. That is, if all oil is imported and there is a boycott against the U. S., we are back to 1973, waiting in gas lines. If a local industry had to begin from scratch, prices would presumably be high for quite a while.

You're right but I would like to point out two things. One is that you seemingly forgot to mention the Strategic Petroleum Reserves [wikipedia.org] that were created after that boycott. Despite what pure capitalists say about its influence on the market, this reserve still exists and has come in handy for taking "loans" out of during catastrophes. This would help us transition from foreign dependence to massive drilling at home.

The other thing is that we actually do a lot of our own oil refining (especially in Texas) [wikipedia.org]. So, it's not like we're missing that huge part of the infrastructure, we import the crude and refine it on our soil. So really what we're missing is just the crude pipeline. The "local industry" you speak of is actually mostly already here to support us, all that's missing is the source and transportation of the crude (since it would probably flip from cargo ships to trucks initially?). What it comes down to is how long would it take a company to drill and lay pipeline? Probably not very long... they have crazy revenues.

There's a third thing to consider, that being that last year the U.S.'s largest export was....gasoline! [yahoo.com] It comes down to the fact that the U.S. is using less gas, and instead of lowering prices to encourage more consumption to increase profit margins, the gas companies sell it off outside the U.S., largely to South America, keeping prices high.

It's a global commodity. There is no way that domestic production can change the global price if global production is declining. Globalisation ensures that your suppliers can sell to the highest bidder, and as capitalists, they'd be crazy not to.

Second, it IS expensive to drill in deep water. Not only in immediate costs, but in potential costs of litigation. You have to prepare you nest egg with that in mind. BP certainly convinced everyone in the industry of that fact. You cannot calculate only the immediate profit, but must consider that in the long term the risk of an evironmental catastrophe will hit you, and you can't reduced your profit margin, even if you were so inclined.

The bottom line is, consumers have to get off the drug. The days of free fossil fuel are over anyways (whatever those idealistic economists who obviously still believe in the tooth fairy will tell you). Suck it up, plan in consequence. Give up the macmansion in the suburb and think of a more reasonable lifelstyle. Don't blame others for what YOU can change? Fuel is expensive? Don't buy it.

(I know, we are all affected by indirect cots of other products we can't do without, but we can certainly reduce that impact by changing our behaviour anyways).

there have been documented cases where the global demand has gone down and the global supply has gone up, and yet the prices have increased. There is something else at work beyond simple supply and demand.

Yes, it is called speculating on the future supply and demand. One is widely expected to go down and the other is widely expected to go up. The spot supply and demand estimates are only part of the equation.

Speculators. During the crash in 2008 speculators got out of oil in a big way and lo, prices plummeted. As they got back in prices have gone steadily back up.

And sorry to go off on a rant here, but to the larger point...

As far as triggering behavioral changes, I would recommend increasing taxes on gas (we're still much less expensive than Europe) and VASTLY increasing tolls for daily commuters. If you live in the city/suburbs and are commuting to the suburbs/city you are a big part of the problem. If employers want to reap the benefits of cheap real estate in the burbs, let them subsidize workers transit or - MUCH BETTER - make them pay so much that telecommuting is very strongly incentivized.

Spend the increased taxes on improving mass transit and information infrastructure, see consumption drop, and maybe the best part would be more people working from home and being able to spend more time with family instead of wasting hours of their days stuck in traffic to go to a job they could easily do from anywhere with a decent net connection (for the most part).

Fuel costs would stabalize or go down for long-haul uses and things like food production while purely recreational use would be treated like an expensive luxury (as it should be).

What we need is not just changing from one fuel source to another, but a radical shift in how our economy works to recognize that physical transport of individual humans from point a to point b is pointless, that productivity has increased so much that a 40 hour work week is just dumb for the most part (and would be better split up between 2 people working 20 hours/week each), and that technology will let us make quite a few office jobs things people do routinely from home rather than being the exception.

The days of free fossil fuel are over anyways (whatever those idealistic economists who obviously still believe in the tooth fairy will tell you).

Those days and those economists never existed. I gather you probably meant "cheap oil". But the transition to "expensive oil" automatically fixes the problem of weaning consumers off the "drug". As those "idealistic economists" would tell you, if you were listening.

Suck it up, plan in consequence. Give up the macmansion in the suburb and think of a more reasonable lifelstyle. Don't blame others for what YOU can change? Fuel is expensive? Don't buy it.

Or continue to live in the suburbs and pay a little extra for gas or whatever your car happens to use. There's not going to be a lot of drama in the long term unless some politicians try to go Pol Pot on the suburbs and force people to move elsew

"Oil is a fungible commodity, sold on the global market to the highest bidder, as McAuliff points out."

It has nothing to do with some grand conspiracy. It's a simple matter of supply and demand. America is competing on the world market for cheap energy. The locality of drilling only determines who gets first sale profits and the quality of the crude. Other than that, the highest bidder gets the oil. Simple as that.

Now personally, I think we should maintain our strategic reserve for times of natural disasters and regional conflict (war). The idea of tapping into it to spook the speculators is flat out wrong. It's also not working anymore. The hedge fund managers are starting to become immune to this political tactic.

"Oil is a fungible commodity, sold on the global market to the highest bidder, as McAuliff points out."

It has nothing to do with some grand conspiracy. It's a simple matter of supply and demand. America is competing on the world market for cheap energy. The locality of drilling only determines who gets first sale profits and the quality of the crude. Other than that, the highest bidder gets the oil. Simple as that.

Now personally, I think we should maintain our strategic reserve for times of natural disasters and regional conflict (war). The idea of tapping into it to spook the speculators is flat out wrong. It's also not working anymore. The hedge fund managers are starting to become immune to this political tactic.

Agreed. And I think there is another point that is missed on the consumer. If you owned an oil company or you have stocks in said petro company where is your incentive to lower prices? There isn't any. You are making cash hand over fist. I mean, no one is bitching about he cost of their IPad when Apple is sitting on a 100 billion worth of cash. But then again, some folks think Apple is "green."

The reason we are a net exporter of gasoline is the cheap natural gas that has come online in the last few years. Mexico is shipping crude to the US to be cracked and then transporting the gasoline back home because it is cheaper than using part of each barrel to create the heat to do the cracking themselves.

Use more precise terms for clarity, please: we exported more finished petroleum products (diesel, gasoline, etc) than we imported. OTOH, of the finished products we consumed in the US, some 45% were still refined from imported crude oil. And some part of the finished products exported from our refineries were derived from imported crude. The US continues to be the largest crude oil importer in the world, and is heavily dependent on imported crude to provide for domestic consumption.

Very true. Which is why Keystone is going to the golf coast. So that the crude can be refined and then loaded onto ships and sold overseas. In fact there's a $2bn anual tax incentive to take canadian crude and ship it overseas. Long term the US tax payer is the one that pays for the Pipeline via tax incentives.

If you wanted to lower gas prices in the US you would pass the Pickens Plan (the bi-partisan Natural Gas Act that was recently filibustered in the senate by those beholden to big oil) to convert comercial semi's to Natural Gas (by the way the original conversion from gas to diesel took 5 years). And then you tax the crap out of petroleum exports. You put those tax dollars into renewables and building a hydrogen infrastructure.

By the way one of the biggest by-products of natural gas production is hydrogen. So if we're going to push natural gas we might as well collect and distribute hydrogen the same time. Supply and demand at work.

I think the big thing we need to do is figure out WHY the prices don't come down from domestic drilling. I would bet it doesn't have nearly as much to do with the cost of drilling, and way more to do with the fact that people on Wall Street decide what a barrel of oil is worth, it doesn't matter where it comes from.

It's a world oil market, Wall Street is only one input. Also, OPEC, while weakened, does control a good part of the supply. Other producers more or less keep in line with OPEC because to dump a lot of oil on the market would decrease the price. There is a long term push for an oil supply crunch due to China, India, and the rest of SE Asia become more industrialized. Add to that the instability of the mideast pushing up insurance rates, that the price remains high is not too difficult to comprehend.

As someone above mentioned, the U.S. is also a net exporter of refined oil products, i.e., gas. There isn't any mystery here either. American consumption is down because of the recession and increased use of more fuel efficient cars. Gas is also an international market. So refiners sell into that market, not strictly the domestic market.

Yes, and as the US is still heavily dependent on crude oil imports, the supply variable to look at is not global production, but global net exports -- because we can't import oil if no one is exporting. There is a long-term trend of the producing countries consuming more of their own production and exporting less. Global net exports peaked in 2005, and are down by more than 3 million barrels per day since then. The US, Europe, Japan, China and India are all oil importers, and are all bidding for a shrinking supply of the available exports.

Is nothing to do with the price of oil per barrel essentially.I will give you an example from up here in Canada where I live, specifically Victoria BC. The price here varies between roughly $1.12/litre and $1.39/litre (i.e. $4.24 to $5.26 US dollars. The exchange rate is $1 Cdn = $0.9997 US so no effective difference at the moment). The price per litre varies on a daily basis, with no real apparent pattern.Now, our gas comes from Alberta as oil, is shipped to the US to be converted into gas, then gets shipped back north to BC (why we don't make it ourselves is beyond me).The price goes up based on anything remotely bad in the news apparently. Revolution in Libya, price goes up. Bad weather, price goes up. Election coming, price goes up. Long weekend coming, price goes up. It drops periodically when things are normal. I have only seen it go over $1.39/litre once or twice and then only for a few hours. When it goes up at one station, it follows at the rest, same thing when it drops.It seems to me that this price war has nothing to do with the price of oil internationally. I haven't noticed a pattern for the most part.However, one change that does happen is if the price of a barrel jumps dramatically up, the price of gas jumps immediately - no matter that the gas we bought actually cost less. However, if the price per barrel drops dramatically, the price at the pump drops slowly if at all.Its nothing more than an industry colluding to ensure they get the highest prices possible, combined with a government that is not interested in regulating it at all because they collect massive taxes on the sale of fuel.So it doesn't surprise me that drilling in the US doesn't affect price at the pump - because the industry that sets the prices has zero interest in lowering the price of gas, they are milking it for all they think they can get away with, and with zero repercussions. Our NA society is built on burning fossil fuels, and nothing is going to change that any time soon.

You've hit the nail on the head (so to speak) with respect to vertical monopolies. While there isn't a giant Standard Oil anymore, the fact that the oil companies control the entire lifecycle (in one way or another) from crude to finished product at the pump shows that we can have the weird market fluctuations you described. (Going quickly up, but taking its sweet time to go down in price.) The fact that gasoline isn't something that has very elastic demand because of the way it is used in every aspect of our economy lends us to the conclusion that vertical monopolies can leverage their monopoly status to keep prices artificially high in the face of real change in the marketplace.

It is funny that our refining capacity never meets the aggregate amount of oil we are pulling out of the ground. (It's more profitable to close the refineries rather than let price go down.)

We've seen the oil companies push prices up to a point, hear the outcry, then lower prices back down slowly so the average person with a busy life doesn't notice that gasoline spiked at $4/gallon up from $2.50. But they never seem to get back to $2.50... the price just stays up where it was, slightly below the heartburn level that caused the reduction in the first place.:)

When you have an item that most people depend upon (and businesses too), you can play fast and loose with the market and not fear losing customers. (I wish the electric car would put a damper on this practice, but I'm not holding my breath.)

If at the pump you had the choice between a global list of gasoline suppliers then yes, all prices would be very similar. Since in a town you only have the choice between a couple local suppliers prices vary.

My comments were based on the idea of: if it doesn't lower prices, why should the U. S. be in the oil business?

The petroleum reserve was designed for major catastrophes. Apparently in its history, total draw-downs have only amounted to around ten percent of the total capacity.

So that is one piggy bank that really hasn't been raided unduly. Thanks for bringing it up! It would be interesting to know if the market considers that large withdrawals could be made or if a major withdrawal would actually cause

Not really, as long as oil is freely traded. If oil spikes from, say, $120 a barrel to $150 a barrel, do you seriously expect US-based producers to turn their back on $30 a barrel extra profit in order to please domestic consumers? They will either export their production or (more likely) expect domestic consumers to pay the market price. It is called the Free Market and the US is supposed to be keen on it. Oil is one of the most transportable, commoditized things around, and the market is world wide.

That is a selfish viewpoint, but I don't expect Iran to look out for us over themselves.

We are all running out of time and these guys are making obscene profits as is. I live in West Texas and see this on a daily basis. Other than safety, there is little account for responsible spending. Example: workers that used to check and maintain the pumpjacks are promoted to "manager" and told to call a consulting/maintenance firm to do any repairs, costing a ton more than ju

No.
The term "buffer" implies an excess, something that would provide for the required flow during intermittent disruptions upstream. Given the numbers involved, the impact of any realistic amount of additional domestic production would not be a "buffer".
Now, what actually would have an affect on the price of gasoline is reducing the amount that is exported. Yeah, that's right. We are the refinery for the world. We (the people who live here) get the mess AND the high prices. Such a deal we're getting in this magical "global economy".

I think you're missing the point, which isn't to drive down oil prices, but to make the country less reliant on foreign oil imports and to improve trade deficits.That's a laudable goal, but unfortunately it doesn't help the consumer, it just helps the Rockefellers and Gettys.Why? Because it's a piss in the ocean. If you have a street full of limonade sellers who sell it at 99 cents per cup, and you have a limited amount that you can sell at 50 cents, you won't do so. There's not enough of your product to have an effect on the market price. So your price will converge towards the common price.

How to make it benefit the public, then, in the short term? Regulation and taxation. The oil industries are given special privileges that they don't need. The US of A is no longer in a boom period where incentives were given to sustain the overall high growth. Start taxing them at a reasonable level for using up non-renewable resources that belongs to the country.

You're artificially conflating oil (a natural resource) with gasoline (a refined product). Yes, you obtain gasoline from oil, but the reason we export it is that we have refining capacity to do so, and export it to countries that don't.
Also, don't make the mistake that gasoline is all we get from oil. Pretty much every bit of a barrel of oil is processed at the refinery, from gasoline, diesel, lubricants/grease (possibly even more critical to our economy than fuels) - and when everything else is made, what's left is made into asphalt.

What, and suddenly the 260,000,000 autos out there are supposed to become more fuel efficient? All the people that own those autos are supposed to suddenly buy a more fuel efficient auto? The people who can least afford this option are also the people that can least afford a new auto.

You may blithely dismiss Limbaugh's point but you can't argue against it.

The AP study looks at actual oil coming out of the ground, which is but a small part of the price of oil.

Since oil is a commodity market and markets are subject to the law of supply and demand, producing more oil will impact the market. Last I heard, U.S. production is part of the world wide market.

Also, since speculation is a primary component of the cost of oil, actions that tend to calm the speculative market will undoubtedly reduce the price of oil at least to the extent that the price is driven by speculation.

For you to argue against this is to argue against all the Democrats who were screaming for Bush to tell the Saudis to increase production. And you also would have to ignore the fact that after Bush opened the outer continental shelf to mere exploration, prices came down as speculators considered the fact that there could be more oil on the market. Lest you forget, when Bush left office, the price of a gallon of gas was less than $2 after being in the high $3 range prior to his executive order.

As for job creation, for you to even suspect that additional drilling wouldn't mean tens of thousands of new jobs is like someone suspecting that water isn't wet.

The point is that the US can't meaningfully impact the price of gas. Maybe a few cents here and there, but that's it. The reason the Saudis can do it is because they have an oil extraction infrastructure that is very broad and flexible, as well as oil that is easily accessible. And even they have a hard time to significantly do it on their own. The US has neither, and yet people seem to think that tapping the piddly extra reserves the US has is going to bring us back to $2 a gallon gas. Fucking ridiculous.

The price of gas also came down during an election year, when some team won the Baseball World Championship, and when there were exactly 27 sun spots on the sun. Which one had the most impact? Show your work.

Lest you forget, when Bush left office, the price of a gallon of gas was less than $2

Lest you forget, when Bush left office, the global economy, lead by the U.S., was heading toward a bottomeless crash of unknown proportions and everybody slowed their purchase of oil products significantly. That is why a gallon of gas was in the $2 range when Obama came in. I don't know how we can expect healthy economic growth *and* low energy prices, nomatter what the source of the energy, at the same time. Simple economics would seem inform us that we can't have both.

I think he is pointing out that in spite of increased drilling in recent years, the price is still going up. Hence, increased production doesn't help. Because the world demand will eat up any "excess" oil that might reduce prices. The only way to "reduce" the price of gas is to not use as much.

And I think the pipeline *will* get built, just not until it is done right. He only "blocked" the pipeline because the a-holes in congress tried to give him an ultimatum.

Speculation. That's what it boils down to, folks. If you really want to see $2.00 gas prices again, outlaw speculation and it will happen overnight. It is absolutely mind-boggling that this practice is allowed with no checks or balances to keep it from driving our gas prices sky high. People will bring up anything else, like gas taxes or domestic drilling, just to draw attention from the real problem. It's almost like no one on either side wants to have that conversation, though.

So, under your system, if I need to buy oil for some purpose, am I allowed to predict that it will be cheaper in a month and wait until then? This really makes no sense to me so I must be misunderstanding.

Please, do correct me if I'm wrong about this, but when I read 'speculation' I don't think 'Waiting for the price to come down to buy the goods'. I think 'buying paper or digital numbers that represent goods'.

Isn't this the same thing with just about any traded object on Wall street? None of those buyers are interested in owning a part of a company, a few bars of gold or a ton of concentrated frozen orange juice. They just want to act as if they did and then sell this facsimile to some other schmuck who wants to act like that... hopefully at a better price than they payed previously.

I mean, this is like children play-acting supermarket, only that the adults afterwards have to actually pay the prices for milk their children have come up with. And THAT is the problem, because so much capital is sunk that way. This capital doesn't really find its way into the market, after all, unless we, the customers, start paying higher prices for our products. The Wall Street does not generate anything of worth. All their gains must be paid and we are the ones to do that.

And therein lies the problem: As long as people are allowed to speculate this way, prices will not go down. After all, prices going down is not good for Wall Street people... unless they're going up much more right after they bought in. There is only one way for prices to go, if you ask Wall Street.

Please, do correct me if I'm wrong about this, but when I read 'speculation' I don't think 'Waiting for the price to come down to buy the goods'. I think 'buying paper or digital numbers that represent goods'.

First, speculation can take many forms, and not all of them involve options contracts. Hoarding is also speculation. At the moment, it is quite profitable to hire Suezmax tankers (day rates are quite low), fill them with crude oil and have them travel very, very slowly to their destinations.

Second, there is no objective way to distinguish between hedging and speculation. Selling and buying futures is an essential mechanism for both producers and consumers to manage risk. Wildly fluctuating prices, which is what you would have in the absence of futures contracts, are bad for everyone. Producers would be less inclined to invest (and less able to secure capital) in growing crops or extracting raw materials because they would not know if they could do it profitably. Consumers would not be able to plan their businesses properly, because they would have no control over their input costs. In other words, prices would be much higher across the board in the absence of futures contracts, because of the greater risk aversion of both producers and consumers.

Third, futures contracts do not tie up nearly as much capital as putting a commodity into inventory (hoarding), which is what would happen in the absence of futures contracts.

Fourth, in anything other than the short term, futures contracts have neutral effect on commodity price. Futures contracts are written in brackets above and below the expected market price. All the futures do is smooth out the fluctuations. Sometimes that works to the benefit of the producers, and sometimes it works to the benefit of the consumers, but neither can hold prices artificially high or low through futures contracts for very long, because the contracts do expire. When new futures contracts are written, the premium at which they are sold reflects the reality of the new supply and demand conditions.

Fifth, this has absolutely nothing to do with "The Wall Street". Energy commodities are traded at the NYMEX, which is on the opposite side of Manhattan from Wall Street, and agricultural commodities futures are traded in Chicago.

In the case of gasoline, part of the problem is that the individual consumer does _not_ have any way of hedging the fluctuations in price through options at the retail level. Individuals have no negotiating power and and must _always_ pay the spot retail price at the pump. It would be very interesting to see what would happen if fixed-price gasoline contracts were offered to individuals (or if individual consumers themselves formed a co-operative to negotiate gasoline contracts with distributors).

The only reason this works is because the actual, true demand for oil can be counted on to continue rising at a pace faster than the supply. If a sudden breakthrough in solar panels occurred, all those people holding oil futures would get screwed. As long as the government doesn't bail them out, all is fine.

Joe Wall Street can rent himself some legal storage to keep his oil in while he's trying to sell it just the same as anyone else. Am I supposed to feel sympathy for someone bidding up the price of tens of thousands of barrels of oil knowing full well that he would never actually be able to take possession of it?

If I go down to Home Depot and buy all of the lumber they have in stock, Home Depot isn't going to let me leave it on their shelves while I

Via the market? Companies selling their product to other companies that use it, rather then speculators inserting themselves between buyer and seller.

Speculation pulls money out of a market and raises prices without adding value simply because people with enough resources are able to force getting their 'share' of whatever is going on. Markets do just fine without speculation, in fact they generally do better with lower prices and greater stability... but fewer useless people getting very wealthy for no other reason then already being wealthy.

Speculation also lowers prices when speculators think the future price will be lower.

Speculation also puts money into a market when the speculators get it wrong. If speculators really are pushing up the price of oil above what it "should" be then the oil producers (part of the market) are taking money from the speculators by taking them up on their promise to buy.

Speculation is not the problem. The safety net provided by government bailing out the biggest speculators (the big banks) is the problem. Let those folks go out of business like they ought to, and we wouldn't have a speculation problem.

I don't have the exact figures, but at one time most oil futures were all about the actual users of the oil - refineries and so on - and were perfectly legitimate. Futures are what is needed to get farmers to raise hogs and grow corn, after all. Things went wrong when the futures were taken out by people who were not in the supply chain at all. This could be made illegal, but hedge funds have enormous political power.

Speculation of this kind has a long history. G K Chesterton, nearly a hundred years ago, referring in passing to the scandal of the time, wheat futures buyers who were not millers or grocers trying to buy up the entire wheat crop in order to raise prices to whatever they thought would not actually collapse civilisation while making them rich. Currently, I believe, over 70% of oil production is accounted for by hedge fund futures. It is a classical cornering of the market - but it could only be addressed by sending gunboats to banana republics like the Bahamas, the Channel Islands, the State of Delaware and the City of London.

The same way it was before the USA deregulated commodities speculation about 15 years ago. A limited number of speculators were allowed, but mostly the price was determined by supply and demand, i.e. most of the people buying commodities were people who actually needed them, not people who were hoping that they could sell them for a higher price.

or maybe just convince people that they have to use your money to buy something that everyone needs, such as oil. If anyone refuses this, then you could invade them with your guns and enslave them. That is way too far out to think it could happen in the real world though.

It is actually simpler than you probably think. The price will be determined by the people who buy oil.

Right now, if you have enough money, you can buy a bunch of oil. But, there are various methods by which you can own the oil but never have to actually take delivery of it. Usually by placing futures orders which allow them to take delivery of the oil at a specific date in the future, which can be weeks or months from now. All we have to do to

That was the motto of the communist system. Just in case you weren't making your comment tongue-in-cheek.

But there is an important point hidden there. In politics, you will hear "free markets are GOOD", "central planning is BAD". Or sometimes the reverse (in Europe). People forget that the point is to maximise the goods and services produced, as well as their access from everyone.

If you have no idea what to produce, a market is a good idea. If you know exactly what to produce, a market is an idiotic idea: central planning is the way to go. If you know that this good or service will produce a natural monopoly, you should go for either a tightly regulated market (but due to regulatory capture, this is dangerous) or central planning.

In real life, there are also externalities. Tax accordingly so that your market works better. Yes, taxes are a vital component of making markets work: you want the real price to be reflected, e.g. pollution must be paid for by the polluter.

TL;DR : regulation and taxes on externalities are important. Monopolies should be public. Leave the rest to the market if you don't know what is optimal. If you do, get rid of the market. In the future, robotic overlords will and should plan the economy for us.

But there is an important point hidden there. In politics, you will hear "free markets are GOOD", "central planning is BAD". Or sometimes the reverse (in Europe). People forget that the point is to maximise the goods and services produced, as well as their access from everyone.

Silly me. I thought the point was to maximize the quality of life of the populace.

I don't really like the idea of the government having any excuse for taxes other than to fund itself. Maybe instead the rules should be changed so it is easier for corporations to be sued over externalities or something.

If the externality is not supposed to happen (e.g. oil spill), lawsuits make sense, but if it's an expected event like the fact that you're using a limited resource that belongs to the common, how do lawsuits fit in? It doesn't really make sense to sue someone over that.

If you don't like that the money from those taxes can be used for anything, a better option is to set up an independent organization that can only use the funds for a specific purpose, like one that receives the taxes from tobacco and can only use them for funding lung cancer prevention and treatment.

Fundamentally, this is hard. Take, for instance, fracking. How do people prove that the antifreeze they are pumping from their wells came from the drilling when it could be either a crack in the well casing as it passes through the water table or it could have been dumped 50 years ago in some mechanic's backyard and finally seeped in?

The solution we have chosen is for someone with power to say that if you want to drill a well or run a car shop, you have to follow these regulations. This isn't perfect and half the regulations were reactive and these days companies act like the regulations are the absolute minimum effort to make, but it helps keep disasters from happening before having to figure out who to sue to fix it.

This is almost too easy. Energy production can easily be planned, and in fact in most of the world, is planned.

Water utilities can be and are planned. When they are not, disaster ensues.

Land development is planned. Try suggesting that cities should get rid of all zoning laws.

Military procurement is planned. It is always better than a private army.

Essential services such as hospitals are frequently planned.

Money supply through central banking is planned.

Initial telecommunication infrastructure was planned.

Large-scale research is planned. The LHC is not the product of market forces, you know.

Roads are planned.

As to why the government may be better than the market? Easy: the market is trying to solve in an unconstrained way an NP problem (efficient market is true if and only if P==NP ; there is actual mathematical proof of that). However, many solutions are not acceptable to society. The government can avoid them, not the market.

After the greatest economic crisis since the Great Depression, where the economy was basically saved by the intervention (planned) of the government, and in the slow-growth sluggish aftermath caused by the stupid "the markets know" mantra, how can anyone think that markets always know best? were you born this year or put into hibernation those last five?

Please spell it out: what are the mechanics of speculation driving up gas prices?

Speculators buy and sell futures contracts. Every time they buy a contract, they are betting that the price of oil will go up. But, whenever they buy, somebody else is selling, betting exactly the opposite - that prices will go down. And, recall that speculators eventually have to sell those future contracts (or have 100 tanker trucks pull up to their homes.) When they do, the price will be determined by the actual facts on the group -- how much demand is there, and how much oil is being produced at the time.

Speculation and futures bend the rules of supply and demand. Gas prices are not determined by actual supply and demand, they are determined by speculators hedging on low supply in the future. Would you care to explain why despite supply being at an all time high just a few years ago, prices never came down to match? You can't say that it has anything to do with our oil coming from unstable nations; it's been that way for a long time, decades before we ever saw gas prices climb above the $2 mark.

I take it what you're asking is how futures contracts actually impact the market price of anything since they are essentially an artificial market not bound by the laws of supply and demand. When speculators buy enough contracts at above the current market price, oil producers see this and start artificially limiting their supply in hopes that they'll be able to sell it all down the road at that higher price, and that causes the price of oil to go up now. We had an agency called the CFTC put in place specifically to prevent this sort of thing from happening, but what happened? Enron happened.

You remember Enron, don't you? They were instrumental in exploiting a loophole in the CFTC's regulatory powers to allow oil speculators to trade outside of those regulations. As the CFTC lost power, the futures market exploded, and as it has continued to increase dramatically over the past decade, so too have oil prices. You have to be out of your mind to argue that oil prices coincidentallyskyrocketed with the futures market.

Storing large quantities of oil is very expensive, unlike, say, gold or diamonds. You can't hoard the stuff. Ultimately, the stuff has to be sold to consumers, and if high prices drive demand down (and demand for fuel is elastic, despite a lot of nonsense to the contrary) speculators will lose their shirt.

The reason why oil are prices are at historicallly high levels, and have been for the past few years, is that global demand has not kept up with global supply, mostly because China and to a l

1. When barrels of crude oil get cheaper, that just boosts the profits of the oil companies. Since all you fools buy the gasoline anyway at $3.50 or $4.00, why would they lower the prices?? You don't have any other choice anyway.

2. As long as US oil consumption is larger than the domestic production, the US cannot expect lower prices for crude oil.

The world oil market has shortages, and increasing production costs. That means foreign oil is expensive.

There are proven ways to reduce the effects of speculation. I know for a fact that increasing margin requirements (the amount of cash you need to put down to hold a contract) is one of them. The trick is getting such tactics passed by a GOP filibuster or (a partially Democratic one when the GOP can't quite hold the line, as Wall Street money is just that good).

Ok, now implement this in China. If you do it in the US alone it will have exactly zero effect.

Frankly, the link between oil prices and speculation is another thing that should be fact checked. Unless I'm missing something the only thing that adds significantly to the price of oil (aside from US sales and oil taxes, things that matter more than a few cents, however rich you think ExxonMobil is, their cut out of your $4 is 2-3 cents) is the money taxed out of it by the insanity that is the saudi government. And even that amount is dropping rapidly according to theoildrum.com.

So pretty much the only action that would have any chance of dropping oil prices more than $0.10 or so would be to invade a few countries in the middle east. And China wouldn't let the US do that. Do you really think that the massive inefficienciency that these regulations would impose would be less than the 2-3% that speculation + refining + transport +... is today ?

Do not take this that I support speculation as an activity in itself. It's morally reprehensible when you think about the fact that a lot people need oil to avoid freezing to death. Then again, given that, speculation is not nearly as reprehensible as driving a Ferrari, or driving where you could walk or bike.

Ok, now implement this in China. If you do it in the US alone it will have exactly zero effect.

China has just as much interest in cheaper gasoline as the U.S. does. I'm sure China would be among the first to cheer if Wall Street wasn't able to pump the cost of a barrel of oil up months before it's even sucked out of the earth.

Personally, I would have thought this was obvious. Any additional oil generated by the U.S. is pretty much a rounding error compared to the major producers, with international markets, American oil well are going to want to earn just as much as international sellers, if they had to choose between selling for less domestically or getting more on the international market they're going to go for more. They're essentially required to do so by their shareholders. In the absence of an amazing discovery of vast reserves of cheap, easy to extract, untapped oil reserves, the only way to actually get lower prices would require price controls and subsidies to force the price of gas lower and, frankly, I think that would be much worse than high gas prices.

You really shouldn't trust Wikipedia. In 2010 the U.S. produced 9,688,00 BBL/Day which ranks us third in the world behind Saudi Arabia and Russia. Those two did 10,520,00 and 10,270,00 respectively. If you add up the numbers in the link below you will see thats 15% not 9%. For some reason you refuse to believe the U.S. is "major producer". A relatively modest increase in production would have an impact on world supply.

well, the 9.6MMbbl/day figure is 'all liquids', which includes natural gas liquids, LPG, ethanol and 'refinery gain' (which is an accounting trick used to inflate our domestic petroleum numbers). the actual crude number is noticeably lower.

This is the problem when journalists with political agendas pretend to be statisticians.
Oil is sold on a global market and goes to many different uses. You cannot look at one part of the supply and say "well, increasing this particular part of the supply didn't affect prices in this other particular market." There are too many other factors to consider: How much oil did other countries use? How much oil was diverted to purposes other than producing gasoline, such as plastics or heating oil? What happened to production in other areas? NONE of this is accounted for in this silly "analysis."
Most telling? The analysis excluded the oil shocks of the early 1970's. Why? That was the clearest time that domestic gas prices (and supply) are driven largely by the global oil market.
Yet, this analysis is being put into papers all across the US. For what purpose? Could it be to deflect criticism from the Presidents' drilling policies?
When an analysis concludes "therefore, the basic laws of economics don't apply," then just like one that says "therefore, the law of gravity doesn't apply," our first instinct should be to question the analysis, not the basic laws.

As I posted elsewhere, please spell this out, because it just doesn't make sense. How do speculators increase the price of oil? What are the mechanics involved? Recall that every time a speculator bets that the price will rise by buying a futures contract, somebody else is betting that the price will fall, by selling a futures contract.

Yes, and the first change you will see is much higher volatility in prices, followed by likely shortages. Then people like you will blame this on "market failure" and call for price fixing. If the government does that, then you'll see real shortages. Fundamentally, futures trading acts to stabilize the supply of goods and guarantee future flows.

This is not responsible reporting. Anything that increases global supply will cause prices to fall, if you hold everything else constant (i.e. compared to where they would have been if you had not increased global supply). Domestic drilling is intended to increase global supply. The problems with the article were (1) it didn't look at global supply -- only domestic production, and (2) it didn't hold everything else constant.

Why on earth would oil companies sell gasoline here for $2.50 a gallon when they can sell it in France for $10 a gallon? Gas prices are higher because we're selling gasoline overseas [usatoday.com]. Welcome to the global economy.

There's at least one domestic downside to America's growing role as a fuel exporter. Experts say the trend helps explain why U.S. motorists are paying more for gasoline. The more fuel that's sent overseas, the less of a supply cushion there is at home.

The price an importer pays to buy a gallon of refined gasoline in France isn't all that much higher than in the U.S. Sure, it's more expensive in France, because you have to pay shipping and there aren't that many refineries in France, but the difference isn't even close to 2.5 : 10. The price to consumers in France is so much higher in large part due to different tax structures.

US oil production will only ever be a small fraction of world oil production. In a free market, all oil costs about the same. So the USA can't influence world oil prices much by increasing domestic supplies. By it could if it could reduce demand because it forms such a large part of the market.

I expected US oil production to be anticorrelated to price because US is out of its cheap-to-get oil. But when world prices get high enough many marginal Wells become profitable.

What the politicians don't want you to know is that the production of crude oil doesn't affect the price at the pumps as much as the production capacity of the oil refineries. In fact, the US has been enjoying an oil boom in 2011 with exports of petroleum at it highest in the past 11 years or more (reference [usatoday.com]).

The republicans are using the seasonal nature of gas pricing (summer months mean higher prices) to pressure Obama into allowing the Keystone XL pipeline to be constructed through environmentally sensitive areas by threatening his reelection over an issue they feel the populace could rally behind. Welcome to election year rhetoric folks.

Blathering liberals think we can solve this problem through reducing demand alone. Archaic conservatives think we can solve through only increasing supply.

They are both wrong and both missing the whole point of supply and demand - 'and'. You have to increase supply/AND/ you have to decrease demand. We can't conserve our way out of European levels of gas prices any more than we can drill our way out of them. We have to work with both and get the radicals on both sides of the equation to start compromising!

Here's the REAL question that rarely gets asked: why should fuel prices be lower? Fuel prices in other countries are much higher than in the US (with some exceptions in the Middle East where the fuel is subsidized to extraordinary degrees), mainly due to taxes. The taxes are there to limit consumption, while bringing in tax revenue to fund other services.

Is there a good reason why fuel prices should be low at all? We know there are costs associated with high use that aren't baked into the price of petrol. Arguably, we've never paid the true price for the fuel we use.

I understand that high fuel prices disproportionately affect the poor; rich people have more than enough money to pay for petrol. But that indicates other things wrong with the infrastructure of cities and how people move around.

Virtually no matter how you look at it, prices for petrol should be higher. On the extreme capitalist side, they should be higher because the product is in demand, the supply is dwindling and public opinion is getting harder to buy (oil spills, climate change). On the more socialist side, prices should be higher through taxes, to move money into providing better infrastructure for all drivers, encouraging better city layouts, and funding already badly strapped local governments. 'Because I hate paying more for something that used to be cheap' isn't really a reason.

There are a myriad of excellent reasons to drill for oil locally which have nothing to do with gas prices.

* Ethically Sourced is betterWhy should we be giving ANY money to cultures that treat women (or other groups based on sexuality or gender) unequally?

That money is far better off going to either the U.S. or Canada.

* Environmentally friendlyIt may seem counter-intuitive that more local drilling is better for the environment, but the simple fact is that we cannot trust other cultures to care as ugh about the environment around drilling as we can. Drilling or pipelines here can be monitored more closely and we can do more to clean up problems when they occur. There are hosts of environmental issues with wells around the world but you'll never know about them because they are swept under the run by tightly controlled government press.

There is also a very logical component to the issue though. The longer you have to ship something, the more likely there will be accidents. Currently we have a vast quantity of oil coming in by ships, and one of which can and do leak. Moving to more local production means eliminating the shipping of a lot of oil from large distances across the ocean.

* Local Jobs

Producing oil locally means more local jobs, end of story. It takes people to build out wells/pipelines, and people to maintain them. Even if the number of jobs once built is not very high, it is non-zero and it requires skilled labor.

That's a few, there are more (such as strategic or price leveling reasons). The fact is we have the oil and gas we need, we should start making use of it ASAP until alternative energy industries can come up to speed.

The thing is that everyone knows we will run out of the stuff eventually and in the meantime it is getting harder and harder to find and extract. There is no reason to think the long term trend is going to be anything but higher and higher. This leads leads to a positive feedback loop amongst the speculators, but actually this is a good thing.

If the government just set the price of oil we would literally just keep using it up until the point there is none left, it will never be in a politicians best interes

How much oil is left is a function of a number of things, like the price. If the government were to mandate $2 prices, we're out of oil. At $4 we've pretty much got the oil we want, but as you say it's getting harder to find every day. Sadly, the prices rise by a factor as time goes on, so the oil price will increase exponentially, not linearly (although $4 may be the result of price perturbations like political tensions, so it's probably not quite at $4 yet...)

That wasn't hypothesis, according to TFS. The hypothesis was that drilling more oil in the U.S. would cause gas prices to decrease. In other words, the amount of drilling in the U.S. would be one factor of many, not the sole factor, for determining gas prices. The analysis showed no correlation between drilling in the U.S. and gas prices, so the researchers were not able to find evidence to support the hypothesis.

I see a similar mistake when people try to "disprove" global warming by showing that climate changes naturally. Just because climate changes naturally does not mean that increasing the amount of carbon dioxide in the atmosphere artificially cannot also change climate. Natural factors (such as solar output or the orbit of the Earth) are some factors, and human-casued factors (such as more aerosols or carbon dioxide in the atmopshere) are others. Of course, there is no one factor that determines gas prices or climate.

No, they don't. The most common cite is 97%. That came from a very [climatequotes.com] flawed [sppiblog.org] study. Among other things, they pared down the original set of respondents down to 79 from over 3000 respondents in order to bring the percentage up. Selection bias much?

you now have glowing articles in the state-controlled Associated Press shilling for the administration

Really? Did you catch this part of the article:

Politicians - especially those in the party that's not occupying the White House - have long harped on high gas prices when expedient. Then-Sen. Barack Obama said in 2008, when he was running for president, that "here in Ohio, you're paying nearly $3.70 a gallon for gas, 2-1/2 times what it cost when George Bush took office."

But Obama, who has seen gas prices go up 73 percent since he took office, was singing a different tune last week in his weekly radio address: "The truth is: The price of gas depends on a lot of factors that are often beyond our control. Unrest in the Middle East can tighten global oil supply. Growing nations like China or India adding cars to the road increases demand. But one thing we should control is fraud and manipulation that can cause prices to spike even further."

Sort of makes him sound like a two-faced idiot to me. On the campaign trail he promised to fix all this and now he's in the same spot as Bush with the same damned effect on gas prices!

And the idiocy of calling the AP "state owned" is really funny considering you just said they ripped on Bush and Cheney about a conspiracy. Hello! For 8 years, Bush and Cheney were president and vice president. If the AP was state owned and if they ruled for 8 years, why didn't they just dissolve it after publishing all those "conspiracy theories" you stated? The AP is a Not-for-profit cooperative that has been around since May of 1846 -- 15 years before the start of the American Civil War!

Gee, who could've thought that after our boy-wonder President has taken a beating in the public for blocking the construction of the Keystone pipeline

It's pretty stupid that he's taking a beating, given that building the northern part of that pipeline (which is the only part he's blocking) would cause the gas prices in the central US to go up. It would basically allow the current glut of dirty Canadian (*not* domestic) oil to bypass Midwest refineries and be sent directly to the Gulf of Mexico, from which it would be loaded on tankers for export to higher bidders.

Yes, supply and demand is important, but you may remember that a few other things happened [wikipedia.org] in late 2008? Things that might have had a little more impact on the supply and demand balance than the piddling amount of oil that offshore drilling might produce.